The purpose of this research paper is to analyse the development and growth of
venture capital funds in India. The venture capital industry in India has been
in operation in some form since 1973. It is now has successfully emerged for all
the business firms that take up risky projects and have high growth prospects.
The venture capital investment assist in fostering innovative entrepreneurship
The private organization which does not want to take finance from the
society may have their view on venture capital. It has potential to become an
important source for financing of small-scale enterprises (SSEs). Venture
capital finance is often thought of as 'the early stage financing of new and
young enterprises seeking to grow rapidly.
With the increased foreign rivalry, a
variety of growth-oriented businesses have venture capital as a solution. Due to
the lack of autonomy and lengthy and complex process, venture capital investment
is usually made by accredited, high-net worth individuals or other financial
institutional investors. This paper focuses on the challenges and opportunities
that entrepreneurs face when it comes to venture capital investing.
India has emerged as one of the world's fastest developing economies in the 21st
century. It is among the most lucrative investment opportunities. India's
economic advantage over other emerging countries is due to its large trained
people capital and knowledge imprisoned in research laboratories. There should
be a type of financing that connects all available resources for effective
exploration and usage.
This relationship is accessible in a variety of forms,
including bank loans, private debt, equities, bonds, and so on. However, each
has advantages and disadvantages that make them inapplicable in certain
situations. Development in a high-growth field needs not just advanced
technology and large sums of money, but also the willingness to take significant
It contributes significantly to the life cycle of developing
businesses by investing in high-risk, growth-oriented projects. It bridges the
gap between high-quality ideas and available funding. Whereas traditional ways
of finance, such as bank loans, government subsidies, and so on, are costly and
time-consuming for new entrepreneurs, venture capital funds have evolved as a
savior, offering required help to cash-strapped creative businesses in return
"Venture capital funding" can also refer to "initial stage investment by small
and emerging enterprises wanting to develop swiftly." It is an investment that
will help to encourage creative enterprise in India. It arose as a result of the
need to give unconventional, risky financing to new companies based on
Venture capital is an investment in new companies
promoted by a technically or professionally competent entrepreneur in the form
of stock, quasi-equity, and at times debt- direct or conditional. It consists of
capital investment, including stock and debt, which entails significant risk and
The venture capital business in India is growing. The slow and arduous evolution
of India's integrated venture capital sector has been constrained by resource
constraints imposed by the overarching framework of socialistic economic
ideologies. While banks and government-owned development finance institutions
provided funding for new businesses, it was only available as collateral-based
money on a project-financing basis, making it difficult for most new
entrepreneurs, particularly those in the technology and services sectors, to
raise funds for their ideas and businesses.
Most entrepreneurs had to rely on
their own financial capital, as well as that of their family, well-wishers, and
private lenders, to accomplish their business dreams. In 1972, the Small and
Medium Enterprise Development Commission proposed that venture capital be
supported as a form of financing for emerging entrepreneurs and
technology. As a result, during the next decade and a half, various incremental
steps will be taken to assist needy technology-based small and medium companies
(SMEs) in gaining access to venture capital funding.
Venture Capital Funding
According to section 2(m) of SEBI Venture Capital Funds (VCFs) Regulations,
1996, A Venture Capital Fund means a fund established in the form of a
trust/company; including a body corporate, and registered with SEBI which (i)
has a dedicated pool of capital raised in a manner specified in the regulations
and (ii) invests in venture capital undertakings (VCUs) in accordance with these
Venture capital funds (VCFs) are investment vehicles that allow individuals to
put their money into freshly created start-ups as well as small and medium-sized
businesses in exchange for ownership in such businesses. These are investment
funds that typically target companies that have the potential to provide
significant profits but also carry a high level of risk.
Venture capital is a
sort of private equity, which means that investments are not available on the
open market. The fund is managed by a venture capital firm, and the investors
are usually investment banks, high net worth individuals, and any other
financial institutions. 
The Securities and Exchange Board of India (Alternative Investment Funds)
Regulations, 2012 ("AIF Regulations") govern venture capital funds (VCFs)
in India (SEBI). It is a Category I Alternative Investment Fund that operates as
a financial intermediary to give finance to small businesses and emerging
start-ups with strong development potential. A VCF's investments are largely in
unlisted stocks of start-ups or developing or early stage Indian enterprises,
limited liability partnerships engaged in new goods, new services, technology,
or intellectual property rights-based activities, or a new business model.
Types Of Venture Capital Funding
Venture Capital Funds are classified on the basis of their utilisation at
different stages of a business. The 3 main types are early stage financing ,
expansion financing , and acquisition/buyout financing.
- Early Stage financing:
- Early stage financing has three sub divisions seed financing, start up financing
and first stage financing.
- Seed funding is a small sum of money provided to an individual in order for him
or her to be available for a start-up loan.
- Start up financing is given to companies for the purpose of finishing the
development of products and services.
- Financing for the first stage of a business: who have exhausted all of their
initial funds and need funding to continue full-scale operations are the primary
beneficiaries of First Stage Financing.
- Expansion Financing:
Expansion financing may be categorized into second-stage financing, bridge
financing and third stage financing or mezzanine financing.
- Second-stage financing is provided to companies for the purpose of
beginning their expansion. It is also known as mezzanine financing. It is
provided for the purpose of assisting a particular company to expand in a
- Bridge financing may be provided as a short-term interest only finance
option as well as a form of monetary assistance to companies that employ the
Initial Public Offers as a major business strategy.
- Acquisition or Buyout Financing:
Acquisition or buyout financing is categorized into acquisition finance and
management or leveraged buyout financing. Acquisition financing assists a
company to acquire certain parts or an entire company. Management or leveraged
buyout financing helps a particular management group to obtain a particular
product of another company.
Structure Of Venture Capital Fund
The Structure Of Venture Capital Fund Is As Follows:
A management company is a business entity created by a
venture firm's general partners (GPs). It's responsible for managing a venture
firm's operations across its funds. The management company collects fees and
pays expenses. It also typically owns the fund's trademark and brand.
Single-member companies, which are most common for new GPs, are treated as
"disregarded entities" under U.S. tax code, while multi-member companies are
treated as partnerships.
General partner (GP):
The manager of a venture capital fund is called a "general
partner" (GP). A GP is responsible for raising money from a network of
investors, selecting investments, and overseeing all of the operational,
accounting, and legal aspects of the fund. A GP often follows an investment
thesis to select investments, targeting a specific segment of the market and/or
stage of investment. A general partner has unlimited liability for the
Limited partners (LPs):
They are passive investors in the fund. Examples of LPs
include pension funds, insurance companies, high-net-worth individuals or other
financial institutions. The liability of limited partners is capped at the
amount of capital the limited partner contributed to the fund. Investors in a
venture capital fund are called "limited partners" (LPs).
Portfolio companies. Companies the fund invests in.
Operation Of Venture Capital Fund
Venture capital investments can be classified as early-stage capital, seed
capital, or expansion-stage finance based on the maturity of the firm at the
time of investment. However, the stage of investment has little bearing on how
venture capital firms work.
Funds start with a capital-raising period during which the venture capital
company seeks investors for the new fund. Potential investors are provided a
prospectus for the fund before committing funds. Following a commitment, the
fund's operators contact all possible investors to settle individual investment
Following that, the venture capital fund seeks private equity investments that
have the potential to provide favorable returns for its investors. This
procedure entails the fund's manager or managers analyzing hundreds of business
plans in search of possibly high-growth enterprises. Fund managers make
investment decisions based on the prospectus and the expectations of the
investors. Once an investment is placed, the fund will incur an annual
management fee of around 2%.
When a venture capital fund's portfolio firm leaves, investors get returns
through a merger and acquisition or an IPO. The revenues will subsequently be
divided pro rata among the fund's investors. In addition to the yearly
management charge, the fund will keep a share of the earnings if the investment
Method Of Venture Capital Funding
Funds can be raised from investors in exchange for the following:
- Share in equity of the Company:
In exchange for a share in the equity of the company
- Participating in Debentures:
A type of debt instrument that is not backed by any collateral but gives the
investor a right to participate in the profit of the company.
- Conditional Loan:
These loans do not carry interest and are repayable to the investor in the
form of royalty after the company seeking investment starts generating
- Income Notes:
It is a hybrid of both; traditional loans and conditional loans, wherein the
entrepreneur will have to pay both royalties and interest at a very minimal
Benefits And Challenges Of Venture Capital Funds
- Assist in the acquisition of business knowledge:
One of the key benefits of
venture capital is that it assists new entrepreneurs in the acquisition of
business skills. Those providing VC have extensive knowledge to assist owners in
decision making, particularly in human resource and financial management.
- Business owners are not required to repay:
Entrepreneurs or business owners are
not required to reimburse the invested amount. Even if the business fails, it
will not be required to return the loan.
- Assists in the formation of important connections:
Because of their knowledge
and network, VC providers may assist business owners in the formation of
valuable connections. This may be really advantageous in terms of marketing and
- Aids in the raising of additional Capital:
VC investors strive to inject more
capital into a firm in order to increase its valuation. They can do so by
bringing in additional investors at a later time. In certain circumstances, the
investing company reserves more rounds of money in the future.
- Assists with technology update:
VC may provide the required capital for small
enterprises to upgrade or incorporate new technology, allowing them to remain
- Reduction of ownership stake:
The primary disadvantage of VC is that
entrepreneurs give up an ownership stake in their business. Many a time, it may
so happen that a company requires additional funding that is higher than the
initial estimates. In such situations, the owners may end up losing their
majority stake in the company, and with that, the power to make decisions.
- Give rise to a conflict of interest:
Investors not only hold a controlling stake
in a start-up but also a chair among the board members. As a result, conflict of
interest may arise between the owners and investors, which can hinder decision
- Receiving approval can be time-consuming:
VC investors will have to conduct due
diligence and assess the feasibility of a start-up before going ahead with the
investment. This process can be time-consuming as it requires excessive market
analysis and financial forecasting, which can delay the funding.
- Availing VC can be challenging:
Approaching a venture capital firm or investor
can be challenging for those who have no network. 
Growth Of Venture Capital Financing In India
The present venture capital financing climate is significantly different.
In India, there has been a venture capital business since 1990. It has now
effectively developed for all organizations that undertake risky endeavors while
yet having tremendous growth possibilities. Bonds, seed capital, and other forms
of risk capital are issued as venture capital in India. In 1988, ICICI formed a
venture capital fund with the Unit Trust of India. There are already a number of
venture capital businesses in India.
Finance institutions, such as ICICI Bank,
have entered the industry and established their own venture capital sections.
Aside from Indian investors, multinational firms have established themselves in
India as a financial institution that invests in huge corporations.
International investors are accountable for India's large-scale capital market
development. India's economy is thriving, owing to considerable changes in the
financial investment structure throughout time.
Previously, India had just
commercial banks and a few financial institutes, but with venture capital
investment, the country has grown substantially. Businesses are increasingly
concentrating on expansion since they can acquire money from venture capital.
The scale and efficiency of business firms in India have grown. With rising
overseas competition, venture capital may help a range of growth-oriented
enterprises. Businesses in India that deal with computer technology, manufacture
products, or provide contemporary facilities are eligible for venture capital
investment. While its impact varies by region, the venture capital (VC) business
is crucial in encouraging entrepreneurship and innovation.
In India, anybody
with a creative company idea with expanding demand, a competent management team,
an ambitious business model, and home-run potential can apply for investment
capital funding. When they identify a business that satisfies all of the
investment requirements, venture capitalists seize the opportunity to fund it in
the hopes of generating a significant profit.
Before to the arrival of venture capital, Development Finance Institutions (DFIs)
operated similarly to venture capitalists by offering direct equity
participation support. The necessity for venture capital became clear in the
mid-1980s, when a substantial number of founders burnt their fingers in such
The venture capital industry in India originated in the late 1980s,
with the Indian government granted legal status to venture capital activities in
1988, and has attracted interest ever since. The first Indian venture capital
firm was the Technology Development and Information Company of India Ltd. (TDICI),
a 50/50 joint venture between ICICI and UTI.
The funds were managed by TDICI and
were registered as the UTI Venture Capital Unit Scheme (VECAUS). After that, the
SEBI (Venture Capital Fund) Regulations, 1996, and the SEBI (Foreign Venture
Capital Investor) Regulations, 2000, developed the industry's regulatory
structure, boosting growth in the business, following the suggestion of the
With the passage of time, venture capital has reached to celestial heights. 323
agreements were signed between January and September 2015, bringing $1.4 billion
in investment. According to Venture Intelligence, acquisitions in the first nine
months of 2015 exceeded the previous year's record high of $1.2 billion (304
agreements). With a host of rules and funding intended for start-ups, the Indian
government budget for 2014-15 forecasted the construction of an
Simultaneously, a start-up fund of INR 10,000 crore
was established. As a result, everything appeared to be on the upswing, and all
of these events appeared to presage a golden period for angel investors and
venture capitalists. Currently, in the year 2022, early-stage VC investments
in India rose over 28 percent to $1.50 billion from $1.17 billion in 2021.
Examples Of Venture Capital Funding In India
Kohlberg Kravis & Roberts (KKR), one of the world's leading alternative
investment asset managers, has agreed to invest USD150 million (Rs 962 crore) in
Mumbai-based listed polyester producer JBF Industries Ltd. The company will
invest in zero-coupon compulsorily convertible preference shares with 14.5%
voting rights in its Singapore-based fully owned subsidiary JBF Global Pte Ltd.
KKR money will assist JBF in completing ongoing initiatives. 
Pepperfry.com, India's largest furniture e-marketplace has secured USD 100
million in a new round of fundraising spearheaded by Goldman Sachs and Zodius
Technology Fund. Pepperfry will utilize the funding to increase its presence in
Tier III and Tier IV cities by adding to its increasing fleet of delivery vans.
It will also build additional distribution centers and extend its carpentry and
assembly service network. This is the greatest volume of investment raised by a
sector-focused e-commerce business in India. 
Venture capital is a vital source of funding for high-growth startups in India
and plays an important role in spurring job creation and economic productivity.
It was introduced in India back in 1988, after economic liberalisation. IFC,
ICICI, and IDBI were the few organisations that established Venture Capital
funds and targeted large corporations. The formalisation of the Indian Venture
Capital market started only after 1993.
This paper examines the challenges and opportunities that entrepreneurs face
while working with venture capital assets, as well as the importance of venture
capital funding in the corporate world. An entrepreneur may benefit from the
assistance of a venture capitalist in a number of ways.
The desirability of
venture capital funding is largely based on the venture capitalists ability to
make managerial contributions to the firm. Long-term funding is not the same as
venture capital. A venture capitalist, on the other hand, invests in an
entrepreneur's idea, nurtures it for a set period of time, and then exits with
the help of an investment banker.
According to the findings, every entrepreneur
is ready to approach Venture Capitalists but is unable to complete all of the
necessary paperwork. Despite the fact that venture capital is scarce, it is
critical to the development of innovative creative ideas. Venture capital
financing has become a part of the popular business in India. These Investments
are growing at an exponential rate and one who is starting his business can look
it as a good option of financing its venture.
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(Nov. 25, 2022), https://core.ac.uk/download/pdf/72802819.pdf.
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(Nov. 25, 2022), https://www.mondaq.com/india/securities/1079416/venture-capital-funds-in-india.
- Akinchan Buddhodev Sinha, Growth and development of Venture Capital
financing in India, ICSI (Nov. 25, 2022), https://www.icsi.edu/media/portals/86/manorama/Venture%20Capital%20SSIM%20BOOK.pdf.
- Tapan Kumar Nayak, A Study on the Growth of Venture Capital financing
in India, IGNITED MINDS JOURNALS (Nov. 25, 2022), http://ignited.in/I/a/304322.
- SEBI (Venture Capital Funds) Regulations, 1996 (§) 2(m).
- Venture Capital Funds, GROWW (Nov. 25, 2022),
- What is a Venture Capital Fund ?, ANGELLIST VENTURE (Nov. 25, 2022),
- Venture Capital Fund, CORPORATE FINANCE INSTITUTE (Nov. 25, 2022),
- Supra note 2.
- Venture Capital Funds , BANKBAZAAR (Nov. 26, 2022),
- Venture capital, EDUPRISTINE (Nov. 26, 2022), https://www.edupristine.com/blog/venture-capital.
- Supra note 7.
- Supra note 8.
- Supra note 10.
- Diksha Shastri, Understanding various types of venture capital funding,
LEGALWIZ (Nov. 26, 2022), https://www.legalwiz.in/blog/understanding-various-types-of-venture-capital-funding.
- Supra note 11.
- Supra note 6.
- Supra note 4.
- Amit Pamnani, Early stage startup investment is the new sweet spot for
VC investors, LIVEMINT (Nov. 26, 2022), https://www.livemint.com/opinion/online-views/early-stage-startup-investment-is-the-new-sweet-spot-for-vc-investors-11663499652671.html.
- Supra note 11.
- Supra note 7.
- Supra note 4.